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On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance—FASB ASC 606 or IFRS 15, the IASB’s comparable standard—replaces substantially all existing U.S. GAAP on this topic.

While the compliance deadline for public organizations has already passed, nonpublic organizations must apply the new revenue standard to annual reporting periods beginning after December 15, 2018.

Use this checklist as a starting point to gauge your readiness and prioritize next steps ahead of the deadline. Remember to communicate regularly with your investors, lenders, analysts and other stakeholders to set proper expectations.

STEP 1: Understand, Scope and Plan

Determine what, if any, new information needs to be gathered to comply with the standard.

Assess whether your organization’s existing systems, internal controls and processes are adequate or if new systems and tools are required.

Look beyond financial reporting to determine how the new standard may affect other aspects of your business, including marketing, sales and pricing.

Assess the tax implications of the new standard. If your company uses U.S. GAAP to determine revenue recognition for income tax purposes, the changes in timing of revenue recognition may result in changes to your current taxable income. It may also impact your organization’s deferred taxes.

Enlist the help of external experts, if necessary.

STEP 2: Technical Analysis and Assessment

Divide your revenue into similar revenue streams and assess the impact of the standard on your revenue streams.

Perform a detailed analysis of the accounting impact of individual transactions in the revenue streams identified. This detailed analysis should include the costs capitalization rules and should confirm and/or further your initial assessment.

Decide on one of the available transition methods and consider discussing these approaches with your financial statement users and peer organizations, if relevant..

Full Retrospective: Under this approach, entities may avail themselves of certain practical expedients.

Modified Retrospective Cumulative Effect: If this method is selected, entities must disclose which results would have been under prior U.S. GAAP in the year of adoption.

Confirm your decisions with your auditor.

STEP 3: Consider Changes to Existing Processes

If your assessment has determined that new information will be needed, determine the changes needed to ensure that that information is gathered accurately and on a timely basis.

Prepare for estimates and judgments. In some situations, you may be required to make more estimates and use more judgment than under current guidance, such as estimates related to variable consideration. Those matters should be highlighted for users through increased disclosure requirements.

Consider discussing changes with lenders to revise debt covenants that are impacted by revenue, such as EBITDA and times-interest earned ratios.

Consider possible changes to compensation arrangements that are driven by revenue, if the timing or pattern of your organization’s revenue recognition changes under the new guidance.

Revise your documented processes and controls to ensure they are sufficient to prevent or detect misstatements under the new guidance.

STEP 4: Implementation and Testing

Run applicable historical transactions through new systems and business processes to calculate the effect on prior periods or the cumulative effect upon adoption date.

Allow time for your auditor to test your restated accounts or cumulative adjustment.

Prepare new disclosures and ensure auditor concurrence.

STEP 5: Stay Up-to-Date with New Guidance

Monitor the activities of the American Institute of CPAs (AICPA) and the joint FASB/IASB Transition Resource Group.

Stay informed on SEC developments, including any amendments the Commission may make to its own staff interpretations on revenue recognition.

Tech companies should keep the following questions and considerations in mind when assessing the new standard’s impact.

[1] VSOE of fair value is frequently established by demonstrating that representative standalone transactions are priced consistently. For example, under current U.S. GAAP, entities might conclude that VSOE of fair value exists for PCS if at least 80 percent of its PCS renewals are priced within a range of plus or minus 15 percent from the midpoint of the range.

[2] Under ASC 606-10-25-27c, if the entity’s performance does not create an asset with alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date, revenue must be recognized over time. In a contract manufacturing arrangement, these conditions might be met because i) the contract prohibits the entity from directing the asset in its completed state for another use, and ii) in the event of the customer cancelling the contract for reasons other than the entity’s breach, the contract provides the entity with compensation for performance completed to date (cost plus a reasonable margin).